Mid-Con Energy Partners: Bankruptcy Risk Remains Low – Mid-Con Energy Partners, LP (NASDAQ:MCEP)


Mid-Con Energy Partners (NASDAQ:MCEP) provided some additional information about its Oklahoma acquisitions. This information shows that the Oklahoma acquisitions were a bet on at least $60 to $65 WTI oil. With those oil prices, the Oklahoma properties could still deliver decent margins and would have favorable PV-10 value compared to their purchase price. At $50 WTI oil, the Oklahoma properties look fairly marginal, especially further down the road, and may have only a slightly positive PV-10.

Performance At Various Oil Prices

The following image shows the historical performance of Mid-Con’s Oklahoma acquisition from the end of February 2018 to the end of December 2018 (roughly 10 months). This is a period where WTI oil averaged approximately $65.

Source: Mid-Con Energy Partners

Thus, we can see that the properties produced approximately $8.6 million in revenues in excess of direct operating expenses during this period. This works out to a bit over $10 million for a full year. Mid-Con’s $27.5 million purchase price works out to a 2.7x multiple, which points to the acquisition being a pretty good value if WTI oil was at $65.

However, due to the high lease operating costs (around $29 per BOE with three-stream reporting and perhaps around $32 per BOE with two-stream reporting), the financials look considerably different at $50 WTI oil.

At $50 WTI oil, revenues would be around $4.5 million more than direct operating expenses over a full year. Mid-Con’s $27.5 million purchase price represents a 6.1x multiple to this.

Reserve Value

The effect of lower oil prices is even more pronounced when looking at the value of the reserves. Mid-Con’s filing indicates that the Oklahoma acquisitions had around 6,005 MBOE in proved developed reserves.

Source: Mid-Con Energy Partners

This translates into nearly $42 per BOE in future production costs (including ad valorem and production taxes). The lease operating expenses per BOE appear to average around $37 to $38 over the remaining life of the assets, as LOE per BOE will increase as production goes down.

Thus, while the PV-10 of the reserves would be around $58.7 million at $65 WTI oil, it would be around $5 million at $50 WTI oil. The $27.5 million purchase price looks fine at $60 to $65 WTI oil, as that would be a significant discount to PV-10. At $50 to $55 WTI oil, the purchase price appears to be higher than PV-10.

Source: Mid-Con Energy Partners

Bankruptcy Risk

Although $50 to $55 WTI oil isn’t great for Mid-Con, its bankruptcy risk remains relatively low at those prices. Mid-Con can still chip away at its credit facility debt with oil in that range, and it doesn’t have any outstanding bonds. As long as Mid-Con can continue to reduce its credit facility debt over time, I don’t think its credit facility lenders will give it too much trouble.

Mid-Con does have $40 million in preferred units that its holders can ask to be redeemed for cash in August 2021. However, the law firm Foley & Lardner published a piece that suggests that companies do not need to take extraordinary steps (such as liquidating the company or selling off major assets) to redeem preferred equity, and that preferred equity provides “no guaranteed right of payment”.

Thus, the August 2021 preferred unit maturity probably wouldn’t trigger a bankruptcy filing even if Mid-Con is unable to fully redeem those units for cash at that time. I’d imagine that something would get worked out, though, such as continued preferred distributions (perhaps at a higher rate) or the conversion of the preferred units to common units at a lower conversion price.

Conclusion

The additional details about its Oklahoma acquisitions show that Mid-Con could use around $60 to $65 WTI oil. At that oil price, the Oklahoma acquisitions would provide a significant amount of value for its purchase price. At $50 to $55 WTI oil instead, the Oklahoma acquisitions would provide okay results initially but would become increasingly marginal as its production declines and its per BOE operating costs increase.

At $50 to $55 WTI oil, Mid-Con probably won’t be able to grow production much, but it could slowly continue to chip away at its debt. There doesn’t appear to be much bankruptcy risk, as the preferred units probably can’t trigger bankruptcy and something will probably be worked out even if Mid-Con can’t redeem them for cash in full.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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